Ignore the engines of economic growth at your own peril

Govt should take urgent steps to ease liquidity to these sectors

The leaders in the government are busy deliberating on the ways to come out of the current crisis with minimum hurt.

The current crisis is not one of our making; it owes itself primarily to indiscriminate provision of home loan mortgages in the US and associated derivative products sold across the world. We have been impacted particularly in the sectors having external links such as garments, diamonds, outsourcing and information technology.

The Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry have held meetings with the finance minister and the Prime Minister and have demanded steps to ease liquidity in the system.

Let us go over the engines of our economic growth and understand the need to provide liquidity to these sectors to sustain growth.

Nearly 60% of our gross domestic product today comes from the service sector.
The mention of service sector brings fond memories of the software sector, which constitutes less than 5% of our service economy, but has played an important role in enhancing our global image and earning valuable foreign exchange.

Among the bigger constituents of our service economy are construction; trade (wholesale and retail); hotel & restaurant; transport, including tourist assistance activities as well as activities of travel agency and tour operator; storage and communication; and services like plumbing, masonry, electrical and carpentry, etc.

The major constituents of the sector, namely trade, construction, non-railway transport, hotels and restaurant and other professional services like plumber, fitter, carpenter, priest, accountant, architect and lawyers, etc have been growing phenomenally in the last decade.

For instance, between 1999-2000 and 2006-2007, construction grew at a compounded annual real growth rate of 10.04%; trade at 8.02%; hotels and restaurant at 8.17% and non-railway transport at 8.77%. The growth in these sectors has been the main reason for the aggregate growth rate despite the sluggishness in agriculture.

The role of the non-corporate sector is very significant in all these activities, namely construction, trade, hotels and restaurant, non-railway transport, storage, real estate ownership of dwellings and business services, and other services.

Although the service sector has such a pivotal role in our economy, the database of this sector is highly disorganised. There is no well-organised mechanism for maintaining a regular and proper database for this sector.

The services sector can be broadly classified into three segments, namely, the public sector, private corporate and the household sector. The first two are considered ‘organised’; the third includes all unincorporated enterprises including all kinds of proprietorship and partnerships run by individuals, which are termed as ‘unorganised’.

We find that during 2006-2007, the share of the so-called ‘unorganised’ sector was more than 80% in trade (wholesale and retail), hotels and restaurant, and business services. It was more nearly 80% in non-railway transport and nearly 60% in construction and storage.

The service sector significantly depends on NBFCs, chits and money lenders for its borrowing requirements. It is impacted more due to the exorbitant interest cost from these sources coupled with pre-empting of borrowings done by inefficient but large corporate.

The banking channels do not even meet 40% of the requirements of the retail trade in our country, leave alone the needs of millions of dhabas spread across the length and breadth of our country.

The inefficient large corporates, due to their proximity to power, create an illusion of being the main actors in our economy, which unfortunately is not true. They have created an illusion that the movements of the Sensex are the primary issues in our economy, which is a bit like having the tail wag the dog.

It is like thinking the models walking the ramp actually represent the millions of housewives in our economy. It is time we differentiate between razzmatazz and the real economy of hewers and savers.

Coupled with this, the predatory government exhibits a tendency of aggrandisement by trying to enhance taxes and regulations on service activities in the form of service tax, FBT, etc. Plus, there are moves to further regulate these activities. Added to the agony is the approach of courts in trying to “clean up” our system, such as banning road-side restaurants which provide maximum calories at minimal prices for the poorer segments.

Inadequate credit availability at reasonable rates (since nearly 30% of the requirement of the service sector is only provided from organised banking channels) coupled with crippling taxation and regulations can kill the goose that lays golden eggs.

The next time our Prime Minister wants to discuss our real economy and its problems, he should invite the representatives of traders, restaurant owners, truck operators, construction contractors; bus operators and money lenders.

They may not be in suits and boots, or wearing a tie; they could well be dhoti-clad and chewing pan and speak in Indian languages. But they are our engines of growth, which should be taken care of and encouraged by our government.


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